A market is a system or process to enable buyers and sellers to initiate and settle transactions. One type of market is an exchange, which may be physical or virtual. An example of a physical exchange is the New York Stock Exchange (NYSE) and an example of a virtual exchange is NASDAQ. The NYSE is a physical exchange, where trading may be done face-to-face on a trading floor. Orders enter by way of brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. Prices are determined using an auction method where the current bid price is the highest amount any buyer is willing to pay and the current ask price is the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although the NYSE is considered a physical exchange, in reality computers are used extensively to manage the transactions.
The Nasdaq is a virtual exchange where all of the trading computerized. The process is similar to the NYSE, in that the seller provides an asking price and the buyer provides a bidding price. However, buyers and sellers are electronically matched instead of physically.
Markets are not limited to the buying and selling of stock. Markets and exchanges exist for physical goods as well: A film festival is often in actuality a film market where distributors and investors attempt to purchase rights to exploit entertainment properties owned by film producers.
Such markets described above are also known as “two-sided” markets because they involve the matching up of many buyers and many sellers so that a market transaction can take place. Single sided markets typically have a single seller with multiple buyers. One example of a single sided market is an auction where one or more bidders seek to purchase a single item until it is sold. An example of a single sided market scheme is Ebay, where each transaction is an auction where many bidders (theoretically) attempt to have the highest bid at the end of some predetermined time period.
There are a number of advantages of having a defined market for enabling transactions in goods, services, or stocks. It has been found that markets are more efficient if information is made more widely available. Resources can be allocated to those most willing to pay for them. When a market exists, the price of an item is more likely to reflect the true current value of the item. Society has an interest in the efficient allocation of its resources. Economists have long believed that two-sided markets are often the most effective mechanism for efficient allocation of resources. Formalized two sided markets currently have been limited to large ongoing concerns such as stock exchanges. However, there are often local but intermittently occurring resource allocation problems that can't be effectively served by existing large markets. In addition it has proved inefficient to create special purpose markets or exchanges for such resource allocation problems. In practice, private social networks—through means such as meetings, phone calls, and emails—remain the dominant option for solving the problem of allocating intermittently occurring and/or local allocation problems. This mechanism has many well-known weaknesses, among which: lack of transparency; on-the-go rule setting; non-competitive pricing and sub-optimal allocations; lack of incentives for truthful revelation of needs; and slowness with resulting high costs.
Two-sided electronic markets to date exist in only one format: large-scale, highly organized and regulated commodity and financial markets, such as the various futures and stock markets (e.g., NY Mercantile Exchange, NYSE, and NASDAQ). Smaller-scale, ad-hoc implementations hardly exist, and if they do, they lack agility (e.g., the Southern California Emissions Control Market controlled by the AQMD). Affiliates of a corporation, business to business (B2B), business to commerce (B2C), and commerce to commerce (C2C) environments, and ad-hoc groupings of non-commercial entities, could benefit from smaller, agile, often only temporary, intuitive, electronic two-sided markets.